What Makes Legal Spend Tougher to Manage Than Traditional Expenses?
The first step towards a possible solution? The answer lies with fully understanding the nuances associated with legal spend management and treating it as a unique challenge compared to managing other business expenses…
Demand is Intrinsically Unpredictable:
The need to purchase less complex goods and services for your business is easier to predict than the need for insourced or outsourced legal services. For example, it’s not surprising when your sales team’s demand for sales training is higher at certain intervals, such as Q1 kick-offs or after hiring new representatives. Conversely, conditions beyond your legal department’s control could result in unexpected changes arising throughout the fiscal year that cause your legal needs as a business to suddenly increase or decrease. A litigation matter could crop up in June that depletes the majority of your legal team’s annual budget before the year is over, for example.
Predictability becomes an even harder goal to reach when managing accrued work or work-in-progress that has yet to be billed. And it’s not just your business’ teams that feel the effects of this unpredictability. It also presents a problem for your law firm’s finance team as the actual work completed may not always match what they anticipated (and pre-billed for).
The bottom line? Reporting on your accruals as well as making informed forecasting and financial decisions rely heavily on accurate, actionable data. Without it, predictable and effective legal spend management becomes a next to impossible exercise.
Billing Enforcement Requires Extraordinary Efforts:
Legal invoices are complex and nuanced by nature. Enforcing your billing guidelines is a labor-intensive responsibility that leaves your in-house team combing through large volumes of invoices to detect potential billing guideline violations. And while your organization might use a corporate finance tool for automating review workflows and payment processing, it can’t be used to decipher the individual line items within legal invoices. By contrast, billing for other business services is a much simpler process. For example, it’s easier to spot the occasions in which you are being charged inappropriately when procuring training for your sales representatives due to the fixed fee packages attached to these types of services.
Enforcing billing guidelines poses an added challenge to legal spend management: maintaining the trusted relationships you’ve built with your law firms. When reviewing invoices and enforcing billing rules, a layer of emotional intelligence and sound judgment is needed in order to know when leniency is or isn’t favorable for your business strategy (as well as the relationships themselves). While your sales team is likely to also establish connections with their vendors, law firm relationships present additional intricacies. Extensive communication plans, agreements on which billing methods to enforce, as well as establishing clear billing guidelines your law firms have to adhere to are just some of the nuances that make law firm relationships a unique challenge for effective legal spend management.
Time Doesn’t (Always) Equal Value:
Legal services are still primarily bundled and sold in the form of hourly blocks, but determining the exact value of every action that happened during that period is difficult, to say the least. And if you’re not entirely sure which tasks are assigned to each hour, it’s hard to know which ones could have been reduced. Additionally, legal invoices tend to be significantly longer due to the complexity and scope of the work compared to simpler invoices for other business expenses that use fixed-fee billing models. For example, there’s a lot more depth and variety to account for in a one-month trial preparation than two days of sales team training (and it’s a lot easier to tell if the value of that training has been maximized).
Invoice reviewers need nuanced, specialized knowledge of legal matters and the depth, as well as the volume of legal invoices, produce a scalability hurdle to overcome. But there isn’t enough manpower or hours in the day for them to review each invoice with equal rigor. As a result, legal teams have historically struggled to evaluate their vendors, either independently or against one another. And while corporate finance tools can answer questions such as, “what was our spend by law firm last year?” through high-level reports, they struggle to answer questions like, “which law firm has been the most cost-efficient for a certain practice area?” that necessitate more comprehensive answers. As a result, most in-house legal departments have been forced to rely on ambiguous determinants like loyalty and prestige when assembling their law firm panel.
Having accurate data containing information around how and where you are spending the most money would allow you and your stakeholders to make informed decisions about possibly initiating alternative fee arrangements (AFAs) that could showcase the true value of your chosen firm’s legal services (or equally, how you should resource your legal work going forward). But when the only data you have is hours, time, and total price, it’s likely you will include much less objective criteria in your analysis of who is an efficient and high-quality service provider.
See how AccuWeather returned 20% cost savings using a dedicated legal spend management tool.